Economics

Bail-out theatre

IN addition to experiencing the now routine fatigue that comes with bail-out news, I started to feel a bit nervous upon hearing that GMAC received a $5-billion lifeline from the Treasury Department. By this point, I have accepted that "too big to fail" is the policy de rigueur and that the federal government will not allow the American car industry to go under anytime in the near future, moral hazard be damned. The plain act of throwing money at GMAC did not immediately trouble me—frankly, I expected it. Rather, I was caught off guard by the way the funds are set to be used. Instead of simply enticing customers with good credit ratings with better deals, GMAC will be revising its criteria to allow financing for customers with credit ratings of 621 or higher.

The move is a reversal—and then some—from the October announcement that only customers with credit scores of 700 or higher would be eligible for loans. While a credit score between 621 and 700 is still considered to be a safe enough bet, the tendency to push people on the borderline of financial health to spend money in order to prop up the market seems to be a dangerous one. It also resembles a failed strategy that we all know well, thanks to the real-estate crisis. Somewhat distressingly, the general principle also appears to be replicated in the recent move to drop mortgage rates to warm up the housing market, but that's another digression entirely.

The motive behind GMAC's decision is clear. General Motors needs to push cars off its lots before it greets Congress again in order to qualify for more assistance, and artificially stimulating demand is the fastest way to do so. It's a mechanism for buying time that doesn't really contribute to the carmaker's long-term survival. It would be nice if Congress could simply be appeased by a demonstrated effort to restructure the company and to implement responsible business practices. Instead, they will be accepting the results of one giant taxpayer-supported clearance that might even be harmful to consumers as evidence that General Motors is able to return to profitability. This sort of empty gesture just doesn't seem like it will bring any good.

May General Motors prove me wrong by using the fire sale to get over this financial speed hump.

The idea that our solution to the current crisis is to perpetuate the behaviors that seem to have caused it is getting maddening. "Too big to fail" has gotten old, but a GMAC bailout makes as much sense as, say, Citibank's, but not with the expressed purpose of making riskier loans.